Any good investment products to hedge student loans?

ratechaser

Hi all,

Our 2 children are, all being well, intending to study at university - the first starting this year. Originally, our plan was to just finance it ourselves, but having read the MSE article, it sounds more sensible for them to take the student loans on the off chance that they never earn enough to need to pay it off (and there are many reasons why that could end up happening).

That said, what Mrs RC and I want to do is to set aside an amount each year equivalent to the loans, so that in future, if their earnings do take off, we can just repay the loans and stop the interest building further.

So my question - are there any good/cheap products that cater for this scenario, or would it be just as effective to open a general investment account, and invest in something reasonably cautious (thinking VLS40 or similar) so that it will likely grow in line with the interest accruing on the loans?

Timeframe is obviously flexible as we don't know exactly when/if it will be needed for loan repayments, but would expect no less than 7 years. Also appreciate that if we took the DIY approach, we would be taking risk on short term volatility at the point we wanted to make a repayment, but can accept that.

Thanks
RC

MaxiRobriguez

It's not just about paying it off, it's about persistent tax every year. They could well end up in a situation where they've not paid off the capital but they pay more in monthly payments than the initial capital.

It sort of depends what industry your kids are going to end up in. If they're heading towards hospitality, the arts, public sector then I'd chance taking the loan and not bothering with a hedge.

If they're going into banking, architecture etc then I'd probably just pay as much as their student costs as possible.

If you really do want to hedge, you need to target an investment that yields more than inflation +3%. Not many "shoe ins" at that - and you'll have to ride volatility throughout.

ratechaser

MaxiRobriguez said:I

It's not just about paying it off, it's about persistent tax every year. They could well end up in a situation where they've not paid off the capital but they pay more in monthly payments than the initial capital.

It sort of depends what industry your kids are going to end up in. If they're heading towards hospitality, the arts, public sector then I'd chance taking the loan and not bothering with a hedge.

If they're going into banking, architecture etc then I'd probably just pay as much as their student costs as possible.

If you really do want to hedge, you need to target an investment that yields more than inflation +3%. Not many "shoe ins" at that - and you'll have to ride volatility throughout.

Thanks and good points. 

Let's just say it's the latter group of industries you mentioned that they are interested in (quite vocationally minded children, they recognise they have a good lifestyle and want to keep it going!). But at the same time, a lot can happen over the next 5-10-15 years - it's easy to study for something and then get disillusioned and change direction. Or there's always the option to be a stay at home parent if they end up in relationships that could support it. Just to be clear, it's not that I'd be pushing them down the 'marry a rich person' path, but it can of course happen!

Incidentally, the rate will not necessarily be RPI+3% after they graduate, so that is worst case. And I'm not assuming I can perfectly hedge the interest element anyway, but that was the point of the question in the first place - do we just treat this as any other investment, or is there something more tailored out there in the market that we could look into. 

jim1999

Seems to me that the better option is to go for a high-risk, high-growth strategy (e.g. >80% equities) on the basis that you don't have to withdraw at any specific point.

If the market tanks for the first three years out of uni and they've got high paid jobs, that would seem to me to be worst case scenario, and it's not the end of the world if they accrue a bit of interest during that period - i.e. it won't harm them in any way.  Meanwhile you can wait for the right time to withdraw the investments.

If you knew categorically that you'd have to cash in the entire investment in 2028 it would be a bit different.

As for specific products that will hedge RPI+3%, not that I know of.  You'd need to be heavily into equities to be confident of beating that figure.

ratechaser

jim1999 said:

Seems to me that the better option is to go for a high-risk, high-growth strategy (e.g. >80% equities) on the basis that you don't have to withdraw at any specific point.

If the market tanks for the first three years out of uni and they've got high paid jobs, that would seem to me to be worst case scenario, and it's not the end of the world if they accrue a bit of interest during that period - i.e. it won't harm them in any way.  Meanwhile you can wait for the right time to withdraw the investments.

If you knew categorically that you'd have to cash in the entire investment in 2028 it would be a bit different.

As for specific products that will hedge RPI+3%, not that I know of.  You'd need to be heavily into equities to be confident of beating that figure.

You might be right that higher risk is needed - fortunately it's not like we would say we 'have' to pay off the loans on a specific date, so if it's in the middle of a market dip, then they can just ride for a bit - ok, it might mean that the kids end up having contributions taken out of their wages 'if' they are earning enough at that point, but that can all be adjusted manually. 

There's an aspect of psychology to all this as well - we've already told them that we will pay for Uni, and just want to create some sort of ring fenced pot to show that the money will be there. 

From an estate planning perspective, there's an argument to putting the money into their names from day 1, but I think Mrs RC would like to maintain a bit of control given they already have a substantial sum coming their way at 18...

Malthusian

MaxiRobriguez said:

If they're going into banking, architecture etc then I'd probably just pay as much as their student costs as possible.

Personally I wouldn't. They might go into banking or architecture, get disillusioned and leave for a career with more modest earnings. Or they might be phenomenally successful, make millions and change career in their 30s having already achieved financial security, then spend the rest of their lives with a relatively low income for student loan repayment purposes.

Bear in mind that to repay the maximum possible student "loan" (going by the MSE calculator) you have to earn north of £55k on average for the 30 years after you graduate to be fully liable for the "loans". Anything less and paying more than the due amount is voluntary taxation.

If their earnings after graduating are high enough that paying their graduate tax in advance is a good risk-free investment, they can always cross that bridge when they come to it. Unless they value the security of knowing where their children stand highly enough that the possibility of voluntary taxation doesn't bother them.

In the absence of any information about the OP's risk profile, VLS 40% wouldn't be the first investment that sprung to mind. The OP wants something that will deliver RPI + 3%. 3% is a hefty risk premium. An investment very heavily weighted towards fixed interest, prioritising reduced volatility over growth, which is what VLS40% is, might produce RPI + 3% (it has been known in the past) but I wouldn't rely on it happening in the future.

I'm not saying the OP should whack it all in 100% equities in pursuit of RPI + 3%, but if they want to prioritise reduced volatility (which is what a bond-heavy fund like VLS40 is designed to do) while also targeting a return of RPI + 3% they need to decide which is more important.

AnotherJoe

What Jim1999 said.

Too many people plump for low risk when actually that's higher risk than high risk, when looked at over the long term.

over say 20 years, there's less risk of not achieving your aims with a notionally high risk (eg high equities) investment ,  especially when you have a lot of leeway over when to withdraw, than by taking a supposed low risk investment that will not only pay back less over almost any time scale beyond 5 years or so but may also be subject to crashes ina similar fashion. Supposed Low Risk investments still got hammered in the covid crash a year ago and IIRC the High Risk ones rebounded quicker.

As long as you arent on a fixed timescale the leeway you have acts as its own risk reduction mechanism.

ratechaser

Deleted_User said:

You could look at student loans as leverage for the family portfolio. I wouldn't borrow to invest if the leverage cost RPI+3%, so I'd be inclined not to take out the loan at all. Which also keeps it simpler.

...which was our starting point, given we have the ability to fund this already. But the MSE article on this is interesting reading, and certainly suggests on balance that taking the loan is the right move. 

If I could be certain that my little darlings would study hard, go on to get high flying careers with big salaries, then just paying now would be obvious - but there are so many variables that could mean that doesn't happen. I would still be very proud of them if they decided to work for nonprofits or in the public sector, but in that case the salary would mean that repayment of the loan might not be needed (and rightly so if they are following a more ethical career than I chose!).

So this is about hedging from the other direction - take the loan, but look at the most suitable repayment vehicle from us, if it is ultimately needed...

grumiofoundation

Deleted_User said:

You could look at student loans as leverage for the family portfolio. I wouldn't borrow to invest if the leverage cost RPI+3%, so I'd be inclined not to take out the loan at all. Which also keeps it simpler.

It’s not the same as taking out a normal loan though. 

It’s effectively taking out a loan with a decent shot you won’t have to pay a chunk of the capital back and with the only situation in which you will end up paying back more than borrowed is if your child has a high paying job. 

Thrugelmir

ratechaser said:

MaxiRobriguez said:I

It's not just about paying it off, it's about persistent tax every year. They could well end up in a situation where they've not paid off the capital but they pay more in monthly payments than the initial capital.

It sort of depends what industry your kids are going to end up in. If they're heading towards hospitality, the arts, public sector then I'd chance taking the loan and not bothering with a hedge.

If they're going into banking, architecture etc then I'd probably just pay as much as their student costs as possible.

If you really do want to hedge, you need to target an investment that yields more than inflation +3%. Not many "shoe ins" at that - and you'll have to ride volatility throughout.

 do we just treat this as any other investment, or is there something more tailored out there in the market that we could look into. 

If there was a guaranteed risk free above inflation return available it would be sold out in seconds. It's the aim of every investor irrespective of their final objective to find such investments. Unfortunately returns will always come with varying degrees of risk. 

coyrls

Deleted_User said:

ratechaser said:

Deleted_User said:

You could look at student loans as leverage for the family portfolio. I wouldn't borrow to invest if the leverage cost RPI+3%, so I'd be inclined not to take out the loan at all. Which also keeps it simpler.

...which was our starting point, given we have the ability to fund this already. But the MSE article on this is interesting reading, and certainly suggests on balance that taking the loan is the right move. 

If I could be certain that my little darlings would study hard, go on to get high flying careers with big salaries, then just paying now would be obvious - but there are so many variables that could mean that doesn't happen. I would still be very proud of them if they decided to work for nonprofits or in the public sector, but in that case the salary would mean that repayment of the loan might not be needed (and rightly so if they are following a more ethical career than I chose!).

So this is about hedging from the other direction - take the loan, but look at the most suitable repayment vehicle from us, if it is ultimately needed...

And if I were a new graduate, I'd be happy enough that I could pick any area of work and have no loan hanging over me (or no higher marginal tax rate, if you prefer). (In fact, that's literally what it was like when I was a new graduate .)

What was the basic rate of tax when you were a new graduate?